Brown-Vitter takes aim at the Big 6
America won't quickly forgive the largest banks for the 2008 financial crisis.
Strange as it may be to hear this from a publication called TheStreet, the rest of the country doesn't like Wall Street.
We think you're crooks, that the game is rigged. Skepticism turned to cynicism after the 2008 financial crisis, when "too-big-to-fail" banks were filled with bad assets, then propped up with government help to run back into the casino.
Since then, the big banks have been struggling to regain traction, while smaller banks have powered ahead. Wells Fargo (WFC) has done well, but JP Morgan Chase (JPM) still trades at a discount to its book value. And Bank of America (BAC) and Citigroup (C) trade at huge discounts to book (see TheStreet).
Goldman Sachs (GS) and Morgan Stanley (MS) were also made bank holding companies in the wake of the 2008 crisis. Together with the other four they make up a Big Six that are called "Wall Street" banks, even though Bank of America is based in Charlotte and Wells Fargo in San Francisco. (For reference, see the Federal Reserve's list of the 50 biggest bank holding companies by assets.)
The Terminating Bailouts for Taxpayer Fairness Act -- co-sponsored by Senator Sherrod Brown, D-Ohio, and Senator David Vitter, R-Louisiana -- would raise capital requirements on the six banks to protect against their failure. A draft of the bill, posted on Scribd by QuartzNews, shows it would impose a 15% capital requirement on these banks. The expectation is that the banks would break up into smaller institutions to avoid the requirement.
Wall Street is "hair on fire" over the proposal, which Standard & Poor's warned would force it to downgrade the affected banks. American Banker editorialized, in effect, to "give Dodd-Frank a chance."
That argument doubtless caused some coffee spills over at the Independent Community Bankers Association, which supports the bill, because big bank opposition is the reason two-thirds of the Dodd-Frank rules have yet to be written.
For investors, however, Brown-Vitter might unlock substantial value. All the banks listed by Forbes as America's "best banks" trade at a substantial premium to book.
Since the crisis, old-fashioned banking has come back in fashion. Loaning money for more than you pay for it turns out to be a better business model than running to the casino -- who knew?
The bill comes up just as the big banks are trying to get bigger on Main Street, expanding their branch networks in major markets, running ads talking about how friendly they are to small business. Yet it forces these same banks to argue that high capital requirements, or a break-up, would hobble them when faced with other large global institutions. See the contradiction?
The bill may be a non-starter, but it's a great reminder that, regardless of what the financial networks and big financial sites based in New York may think about Wall Street, the rest of the country has neither forgiven nor forgotten what went on in the last decade. It's pretty much how much of America feels about the big banks. It's a bipartisan feeling.
That's the message of Brown-Vitter.
At the time of publication, the author had no investments in the six big banks mentioned here.
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Dick Bove a former bank regulator and current analyst made a good observation about this proposed bill, in essence how it hobbles US banks while doing nothing toreducfe the risk presented by foreign banks to the world's economy....expecially Chinese banks. A look at the top ten banks by assets proves his point.
|Rank||Bank||Country||Total Assets, US$b *||Balance Sheet|
|2||Mitsubishi UFJ Financial Group||Japan||2,803.42||30/09/2012|
|3||Industrial & Commercial Bank of China||China||2,763.59||30/09/2012|
|7||Japan Post Bank||Japan||2,513.21||30/09/2012|
|8||JPMorgan Chase & Co.||USA||2,321.28||30/09/2012|
|9||Credit Agricole SA||France||2,317.12||30/06/2012|
|10||Royal Bank of Scotland Group||UK||2,225.14||30/09/2012|
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These companies won't soar like other plays in the sector, but they make for great income sources.
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